In India, dodging taxes is part of the game

In a country long defined by its poverty, it's easy now to find India's rich. They're at New Delhi's Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the Louis Vuitton and Christian Louboutin stores.

In a country long defined by its poverty, it's easy now to find India's rich.

They're at New Delhi's Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the Louis Vuitton and Christian Louboutin stores. They're shopping for Lamborghinis in Mumbai. They're putting elevators in their homes and showing off collections of jewel-encrusted watches in Indian luxury magazines. They're buying real estate in comfortable but unpretentious neighborhoods — neighborhoods thought of as simply upper-middle-class just a couple years ago — where apartments now regularly sell for millions of dollars.

The reality is simple: "There are very few people who are paying taxes," said Sonu Iyer, a tax expert at Ernst & Young in New Delhi. And tax dodging is everywhere. "It's rampant — rampant."

If the generalities of that have long been known here, finance minister Palaniappan Chidambaram stunned the country in late February when he proposed a new tax on the country's top earners. The surprise wasn't the temporary 10% surcharge on those earning more than Rs 10,000,000, or about $185,000, per year, but the number of Indians who fall into that category.

That number? Just 42,800 people.

"Let me repeat," Chidambaram told Parliament in his budget speech, making sure no one thought he had misspoken, "only 42,800" people say they earn that much.

In a country of 1.2 billion people, a country where years of staggering economic growth annually create tens of thousands of new millionaires and a recent slowdown has done little damage to a thriving luxury goods market, far less than one ten-thousandth of the population admits they are in the top tax bracket.

With so few Indians willing to come clean, the perennially cashed-starved government has to scrabble every year for revenue.

Among the rich, dodging taxes has become second nature, said Jamal Mecklai, CEO of Mecklai Financial, a Mumbai-based financial consulting firm. About 158,000 Indians are thought to be dollar millionaires, according to a 2012 Credit Suisse estimate, though some analysts believe the number is far higher.

"It's just taken as the reality" that most wealthy Indians are cheating, he said, adding that he pays everything he owes. India's top tax rate is currently 30%.

But it's not just the rich evading their taxes. Less than 3% of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers say they earn more than 1,000,000 rupees per year, or about $18,000.

Most of those not paying have legitimate reasons. Well over half the population earns so little they don't have to pay income taxes. Despite its ever-growing population of nouveau riche, more than 400 million Indians still live below the poverty line.

Millions more people are exempt because regulations exclude agricultural income from taxes, no matter how much is earned. Since India has hundreds of millions of small farmers, and a powerful bloc of wealthy farmers, that's a tax break few politicians dare challenge. Various other tax breaks legally keep many more people off the tax rolls.

The bulk of those paying income taxes, experts say, are salaried employees whose companies are responsible for making their tax payments. While those taxpayers can fudge their numbers to an extent, using inflated receipts to magnify tax breaks on expenses like housing, it's extremely difficult for them to completely escape tax authorities.

But most everyone else — from the barons of family-owned businesses to doctors, lawyers and small traders — operate in largely cash economies that enable them, if they want, to hide most of their income.

The size of India's underground economy and the amount of lost taxes is widely debated, but even the lowball figures are immense in a country with a nearly $2 trillion GDP. In recent studies, experts estimated that anywhere from 17% to 42% of the economy operates beneath the official radar.

Billions of dollars are widely thought to be hidden in Switzerland, Singapore and other tax havens.

Then there is the strange case of Mauritius. More than 40% of foreign direct investment in India comes through this tiny island in the Indian Ocean. In part, that statistic reflects an India-Mauritius tax treaty that legally eases the flow of investment funds into India. But, experts say, it also allows Indians to launder vast amounts of untaxed wealth by sending their illegal cash to Mauritius, then "round-tripping" it back to India in the form of legal investments.

If it would take concerted effort to shut down complex, international money-laundering operations, catching at least some of India's high-end tax dodgers should be ridiculously simple. This is, after all, a country where flaunted wealth often seems as common as traffic jams.

How about targeting the buyers of the 25,000 luxury cars sold last year in India? Or the buyers and sellers of big-budget apartments? What about the people racking up thousands of dollars a month in credit card bills? Maybe tax investigators could go to those high-end malls, looking to see who is buying all the expensive shoes.

While the government says it recently has begun targeting some big spenders, mailing notices to tens of thousands of people they say may have underpaid their taxes, few believe officials have truly become aggressive.

"It's not really that difficult to chase down the tax dodgers," said Mecklai, the consulting firm CEO. "It's just a matter of putting the machinery in place."

So why isn't the government doing that?

The answers range from sheer incompetence to corrupt tax bureaucrats to a political class accustomed to making vast wealth on the side, and unlikely to do anything that might jeopardize its ill-gotten gains.

Certainly the Indian public sees official corruption as a major part of the equation.

"Of course I don't pay all my taxes," said a New Delhi businessman who spoke on condition he not be named because he was admitting to breaking the law. "Why should I pay my taxes while the politicians are getting richer and richer every day?"

Such talk is, experts say, the most commonly heard rationale for tax evasion, one entrenched by decades of political corruption and waves of official scandals.

But it doesn't explain everything. Iyer, the Ernst & Young tax expert, notes that the culture of tax-avoidance runs deep in India. She points particularly to the way buyers and sellers of real estate openly discuss how much of the price will be paid in "white" declared money, and how much will be paid under the table in "black."

"No one thinks of it as something to be ashamed about," she said. "In a country of holier-than-thou's, no one thinks that it's a blatant lie" to cheat on your taxes.

Embarrassment, she said, may be what India needs most of all.

"The moment this society establishes a stigma to it, I think you'd see a change."